Country’s Banking Crisis Highlights Need to Push for Oversight

The international community has yet to prioritize the establishment of an Afghan state that can survive without large-scale external assistance. The beginning of the transition process offers an opportunity to start a long-delayed conversation with the Karzai government about that goal and the commitments required on both sides to meet it.

Afghan President Hamid Karzai will officially mark the beginning of the transition process in Afghanistan in a speech on March 21, a process slated to run from this year through 2014. American policymakers, to date, discuss the process of transition in Afghanistan almost wholly in terms of U.S. troop levels, progress training Afghan security forces, and limited efforts to reconcile and reintegrate Taliban insurgent fighters.

But questions about the political and financial sustainability of the Afghan state itself are of far greater long-term concern for our engagement. And the answers to those questions do not appear to be good.

The government’s mismanagement of Kabul Bank may no longer top the headlines as it did this summer. But its effects continue to reverberate. The bank is the country’s largest and the mechanism through which the bulk of Afghan civil service and security forces’ salaries are distributed. Its provision of poorly accounted for loans in the absence of Afghan government oversight has endangered the savings of thousands of Afghan citizens and the larger system of international assistance on which the government is so dependent.

Separate delegations from the U.S. Treasury Department and the International Monetary Fund visited Afghanistan last month to discuss the country’s banking crisis with their counterparts in Afghanistan’s Ministry of Finance. They left with grim assessments of the government’s efforts to staunch losses from Kabul Bank, which was taken over by the state central bank this summer after public revelations about the scope of bad loans and investments made by the bank’s politically connected and minimally regulated leadership.

The Afghan government insists that it can still recover the bulk of the outstanding bad loans—which some reports put in excess of $900 million—but the IMF has pushed for a rapid sell-off of the bank to forestall the drain on state finances. The IMF refuses to approve an extension of its economic support program and credit lines for the Afghan government until the Kabul Bank issue is resolved, and its support program is a key condition for other international donors.

The European Union, whose institutions are collectively the second-largest donor to Afghanistan after the United States, warned last month that its commitments will be subject to review if the IMF agreement is not restored. And the United Kingdom, which is the largest single contributor to the Afghan Reconstruction Trust Fund, or ARTF, announced on March 9 that it would indefinitely delay the disbursal of over $137 million in payments pending a resolution of the dispute. The ARTF, a World Bank-managed pool for donors, is the largest direct contributor to the government’s operating and development budgets. Without its continued support the basic functions of the Afghan government are at serious risk.

The Afghan government is heavily reliant on international financial assistance for its limited operations. Domestic revenue financed only 32 percent of its 2009-2010 budget. But the government is also weakened by the fact that the bulk of money flowing into the country bypasses the government entirely in favor of donor-selected personalities, programs, and priorities. The government managed a mere 23 percent of total aid Afghanistan received from 2002 to 2009.

As part of the transition process the Afghan government is seeking to obtain a long-term strategic partnership with the United States. A top priority for the government in negotiating this agreement is consolidating greater control over international resources. President Karzai, in his speech to the Munich Security Forum in January, reiterated past calls to eliminate “parallel structures” like private security contractors and Provincial Reconstruction Teams and to bring international assistance into formal government channels.

At the July 2010 Kabul Conference the international community endorsed efforts to channel as much as 50 percent of their assistance through the Afghan government within the next two years. But in the wake of the IMF dispute this pledge now appears to be a “nonstarter” in the words of one diplomat speaking to The New York Times.

On paper, the Afghan government is one of the most highly centralized states in the world. The executive branch controls appointments and budgets down to the local level. In practice, however, it also competes with the armed insurgency, local powerbrokers, and other beneficiaries of the war economy for control of scarce power and resources.

If international donors continue to support favored nongovernmental actors, Afghan government control can be expected to fragment further as the international military and economic forces backing up the current unstable political balance of power recede. This has had dangerous consequences for Afghanistan and its neighbors in the past.

But one-way commitments from the international community to the Afghan government without accompanying oversight and conditions on how that assistance is used risks entrenching an unstable balance of political power that stokes domestic opposition and insurgency, and encourages moral hazard on the part of the Afghan government.

Some internal Afghan actors may exert pressure on President Karzai’s activities at the local level. International donors, however, underwrite his government and facilitate the war economy. They hold the greatest potential levers of accountability. Oversight from the international community to date has been only selectively applied at best and is complicated by our short-term security priorities, Afghan sovereignty, and the desire to emphasize an “Afghan-led” transition.

Unfortunately the international community’s ceding of responsibility contributes directly to corruption, mismanagement, and reluctance on the part of the Afghan government to undertake the difficult tasks of mobilizing political and financial support from the Afghan public. This is a classic rentier state scenario with serious consequences for the health and sustainability of the state absent large-scale international support. And that support is not unlimited, as the reaction of European donors to the Kabul Bank and IMF situation clearly shows.

The Obama administration has to date avoided discussing in detail what sort of Afghan political structure it seeks to support through and beyond the transition process despite assurances from administration representatives of their desire to extend a commitment to Afghanistan beyond 2014. The United States is the largest contributor to the IMF and the largest single donor to Afghanistan. It does not necessarily need the fund’s seal of approval to continue its support for the Afghan government. But the United States cannot support the current political system in Afghanistan alone—particularly given our economic climate at home and the new Congress’s desire to slash government spending.

A serious discussion of transition in Afghanistan needs to take place now, not in 2014. It requires two-way commitments from the Afghan government backed by serious oversight from the international community. Current funding practices have neither succeeded in empowering a strong-man executive regime capable of consolidating a hold over the country—as President Karzai might want—nor in establishing a more stable internal balance of power capable of identifying Afghan public priorities and holding leadership accountable.

If the Obama administration and the Karzai administration continue discussing the transition solely in terms of troops and trainees they are unlikely to be prepared for the next Kabul Bank crisis. That will have serious consequences for the sustainability of Afghanistan’s government and the U.S. effort there.

Colin Cookman is a Research Assistant for National Security at American Progress.